Evaluating monetary policy effectiveness in North Macedonia: Evidence from a Bayesian FAVAR Framework

Magdalena Petrovska (), Jasna Tonovska (), Miso Nikolov () and Ррñ‚ð°ð½ Сулејмани ()
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Magdalena Petrovska: National Bank of the Republic of North Macedonia
Jasna Tonovska: Faculty of Economics – Ss. Cyril and Methodius University in Skopje
Miso Nikolov: IUTE Credit Macedonia
Ррñ‚ð°ð½ Сулејмани: National Bank of the Republic of North Macedonia

No 2023-01, Working Papers from National Bank of the Republic of North Macedonia

Abstract: This paper has adopted a Bayesian FAVAR approach to examine the monetary transmission mechanism in North Macedonia. The model is based on a broad data set that encompasses 140 monthly time series spanning between January 2010 and January 2019. In particular, the impact of policy on bank portfolio variables, and the impact of policy on economic activity variables have been evaluated. Our findings show that monetary tightening, causes a fall in output, inflation rate, employment, bank lending, the stock of government securities held by banks, and equity prices. On the other hand, it increases short-term money market rates, lending rates, deposits, and only in the immediate aftermath of the key policy rate rise, the share of non-performing loans in the loan portfolio. The study is expected to provide useful input to monetary policy implementation in North Macedonia. The study as well enriches the literature in this domain by discussing the challenges facing monetary authorities of small open economies with fixed exchange rate regimes in understanding how their policy instruments work through the economy.

Keywords: Monetary transmission mechanism; FAVAR; Bayesian estimation; Monetary policy (search for similar items in EconPapers)
JEL-codes: E47 E52 (search for similar items in EconPapers)
Pages: 21
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mon and nep-tra
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